Venezuela, a nation spiraling into a humanitarian crisis, has missed a debt payment. It could soon face grim consequences.

The South American country defaulted on its debt, according to a statement issued Monday night by S&P Global Ratings. The agency said the 30-day grace period had expired for a payment that was due in October.

A debt default risks setting off a dangerous series of events that could exacerbate Venezuela's food and medical shortages.

If enough holders of a particular bond demand full and immediate repayment, it can prompt investors across all Venezuelan bonds to demand the same thing. Since Venezuela doesn't have the money to pay all its bondholders right now, investors would then be entitled to seize the country's assets -- primarily barrels of oil -- outside its borders.

Venezuela has no other meaningful income other than the oil it sells abroad. The government, meanwhile, has failed for years to ship in enough food and medicine for its citizens. As a result, Venezuelans are waiting hours in line to buy food and dying in hospitals that lack basic resources.

If investors seize the country's oil shipments, the food and medical shortages would worsen quickly.

"Then it's pandemonium," says Fernando Freijedo, an analyst at the Economist Intelligence Unit, a research firm. "The humanitarian crisis is already pretty dire ... it boggles the mind what could happen next."

It's not immediately clear what steps bondholders will take. Argentina went through a vaguely similar default, and its bondholders battled with the government for about 15 years until settling in 2016. Every case is different, though.

Venezuela and its state-run oil company, PDVSA, owe more than $60 billion just to bondholders. In total, the country owes far more: $196 billion, according to a paper published by the Harvard Law Roundtable and authored by lawyers Mark Walker and Richard Cooper.

Beyond bond payments, Venezuela owes money to China, Russia, oil service providers, U.S. airlines and many other entities. The nation's central bank only has $9.6 billion in reserves because it has slowly drained its bank account over the years to make payments.

The S&P default announcement Monday came after Venezuelan government officials met with bondholders in Caracas. The meeting was reportedly brief and offered no clarity on how the government plans to restructure its debt.

The Venezuelan government blames its debt woes -- and inability to pay -- on a longstanding "economic war" waged by the U.S. More recently, the Trump administration slapped financial sanctions on Venezuela and PDVSA, barring banks in the U.S. from trading or investing in any newly issued Venezuelan debt.

But experts say the socialist Venezuelan regime that has been in power since 1999 bears the brunt of the blame. It fixed -- or froze -- prices on everything from a cup of coffee to a tank of gas in an effort to make goods more affordable for the masses. For years, Venezuelan leaders also fixed the exchange rate for their currency, the bolivar.

Those moves were among the driving forces behind the food shortages. Farmers couldn't sell at low prices without going out of business because their cost of production was much higher. Importers also couldn't afford to ship in food, knowing they would have to sell at much lower prices than what they paid for at the port.
When food shortages grew worse, an illegal black market emerged where venders sold basic foods at vastly higher prices than the government's artificially low prices. Inflation soared, making the bolivar almost worthless.
One U.S. dollar currently buys more than 55,200 bolivars. At the beginning of the year, a dollar was worth about 3,200 bolivars, according to dolartoday.com, a website that tracks the unofficial rate that millions in Venezuela use to determine payments.
The International Monetary Fund predicts that inflation in Venezuela will hit 650% this year and 2,300% in 2018.

The widely reported story of a default in Venezuela missed one key element: it really did not default on over a billion dollars in principal and interest payments.

Venezuela bond holders said in off-record conversations on Tuesday that they received principal payments on PDVSA 2017s and 2020s and another said he was "saved" by a Russian back on Sunday with support for his position in PDVSA 2020 bonds.

On Wednesday, embattled Venezuelan oil giant PDVSA said that coupon payments for its 2019 and 2027 maturing bonds were "in the mail." The government also said that the coupon payment for the Venezuela 2019 and 2024 bonds were on their way as well.

After becoming a leading emerging markets news story on Tuesday, hitting the headlines in the Financial Times and being displayed front-and-center on its home page yesterday, Venezuela is now an afterthought.

The Emerging Markets Trade Association -- a group of emerging market specialist banks and traders -- agreed on Wednesday to continue trading bonds with accrued interest instead of flat. Investmen firms trade bonds flat typically if bonds are in default, and trade bonds based on interest payments due if bonds are believed to be paid at some point. In other words, the market thinks Venezuela will service its debts, though risks remain.

At this point, bond holders have not agreed to call the bonds, nor accelerate, a term used in the market to mean that the key lenders to PDVSA and the sovereign have agreed to demand immediate payment of principal. That is the key thing to watch for. The rating agency downgrades and jumps in prices on Venezuela's credit default swaps have not been accurate indicators to gauge a true Venezuela default.

The Venezuela trade is arguably the riskiest bet in the world. Spreads of Treasury debt hit around 4800 basis points for short-term debt last week then fell to 3900 in a matter of two days, a massive move and a big money maker for investors who bought long when the market was looking most desperate.

Fitch hit Venezuela with a restricted default rating on Tuesday, sending the market into a mild panic. The rating can be triggered when an issuer is late on payments beyond the usual settlement or grace periods, as was the case yesterday.

"The Venezuelan government displays limited transparency in the administration and use of government-managed funds, as well as in fiscal operations, which poses challenges to accurately assessing its fiscal state and the full financial strength of the sovereign. And PDVSA displays similar characteristics," Fitch analysts led by Lucas Aristizabal in Chicago wrote in a note.

Fitch and Standard Poor's notes were the tone setters for Venezuelan bonds yesterday.

"The selective default was expected," says Fernando Pertini, a money manager running Millenia Asset Management, now based in Costa Rica. "Venezuela is no longer a passive, high-yield carry trade. With low cash prices for longer-dated bonds, you are getting sufficient defensive characteristics priced in. If typical recovery value is in the 30s, and you add a strong backstop in support from Russia and China with strategic oil reserves as collateral, you have just enough cushion. If these bonds go into the 20s, we will be there," he says.

Pertini sold out of the Venezuela 2027 earlier this summer.

Close Venezuela-watchers think Venezuela will not default.

One other risk is that an aggressive short selling vulture fund swoops in and buys up a chunk of Venezuela and/or PDVSA bonds, then accelerates and asks for the government to pay up. Such a move is plausible and would force Venezuela into a hard default. This is probably one of two worst-case scenarios. The other is simply the Venezuelans run out of cash.

Venezuela and PDVSA are no stranger to default risks and payment reschedulings. The market has a long memory. Investors tend to punish those who they have entrusted with their capital in the past. In 2003, PDVSA was the sexiest oil company in Latin America. Hugo Chavez came to power and got into a fight with their rather apolitical leadership, sacking key players. Oil production ground to a halt and bond prices fell. Chavez told the company it was going to stop paying employees and start paying bond holders instead. It was a mess. But the debt payments were all made, and within 12 months of the Chavez-PDVSA imbroglio, the country's bonds were trading at a premium. Venezuela is far from trading anywhere near par, let alone a premium.

Bond prices for the Venezuela 2026 fell this month when the government announced its interest in refinancing its debt. But on Tuesday, despite the credit rating agencies notes, there was very little movement in this particular issue.

With principal payments out of the way, Venezuela now just has to deal with making good on its interest payments. No principal is due until later next year, giving the beleaguered of Nicolas Maduro a few months of breathing room to save Venezuela from a real default.

With triple digit inflation and at least two years of economic contraction, Venezuela is going through its own Great Depression. A political crisis also has many people wondering whether Maduro will stand for re-election next year, or hold onto power.

Russia Offers Venezuela Debt Relief
Moscow agrees to restructure $3 billion in debt it is owed by its South American ally

Spoiler:

MOSCOW--Russia threw a lifeline to Venezuela on Wednesday, restructuring the more than $3 billion it is owed by its economically and politically troubled South American ally.

The Russian Finance Ministry said the debt of $3.15 billion would now be repaid over 10 years, with minimal repayments during the first six years.

"Reducing the debt burden to the republic from the restructuring of liabilities will allow the funds that have been freed up to be allocated to the country's economic development, to improve the liquidity of the debtor, and to increase the chances of all creditors to recoup credits provided to Venezuela," the Russian finance ministry said in a statement.

The agreement comes just as Venezuela's cash-strapped government teeters on the edge of a default on some $150 billion in outstanding debt . Struggling with a crumbling state-led economic model, President Nicolás Maduro's administration is seeking to renegotiate payment terms with its creditors in an effort to free up import dollars needed to resolve chronic shortages of food and medicine.

"Venezuela is advancing toward the recomposition of its external debt, to the benefit of its people," Mr. Maduro's top economic adviser, Simon Zerpa, said in a Twitter post, lauding the deal with Russia.

Venezuelan officials said the agreement would allow them to increase imports from Russia, including of wheat. The restructuring deal Wednesday doesn't cover $6 billion in debt that Venezuela's state energy giant PdVSA still owes to Russia.

PdVSA, the lifeblood of Venezuela's oil-dependent economy on Wednesday said it made an interest payment on a bond that matures in 2027. The $80 million was originally due on Oct. 12 but had become one of several bond payments that the government has fallen behind on since last month, raising concerns of an imminent default.

Venezuela over the past decade has turned to allies like Russia for economic support as Caracas aimed to distance itself from its ideological foes in Washington. Loans and credits from Russian state-controlled oil giant PAO Rosneft to PdVSA have been vital for the South American country, which has seen oil production fall and its economy shrink by a third since 2014, according to the International Monetary Fund.

Mr. Maduro has blamed his country's financial troubles on a series of sanctions leveled by the Trump administration earlier this year and has turned to his allies, especially Russia and China, for breathing space.

"We believe that the Venezuelan government and people are capable of properly handling their debt issues," China Foreign Ministry spokesman Geng Shuang said in news conference in Beijing Wednesday.

LONDON, Nov 30 (Reuters) - A Bank of England policymaker said Britain must not fall into an illusion about its public debt, which soared after the financial crisis and could pose a threat to the country’s economy, despite the lack of apparent concern among investors now.

Richard Sharp, a member of the BoE’s Financial Policy Committee, said it was important to recognise that Britain’s debt levels of nearly 90 percent of gross domestic product might prove stretched if future shocks occur.

“To my mind, low market interest rates and a persistent excess of global liquidity could be creating an illusion of readily available spare national debt capacity,” Sharp said, in comments prepared for a speech to University College London.

“The global financial crisis taught us that fragilities can be more real than apparent and that global spillovers mean that broadly shared systemic fragilities can lead to disastrous contagion and amplification,” he said.

Britain’s budget forecasters last week said the country’s debt was expected to peak at 86.4 percent of GDP this year - about double its level before the global financial crisis - before falling in the coming years.

But they also linked the expected fall in the debt ratio largely to the sale of shares in state-run bank RBS and an accounting switch to get housing association debt off the government’s books. At the same time, the Office for Budget Responsibility sharply cut Britain’s economic growth forecasts.

Bank of England Governor Mark Carney has previously said that Britain remains dependent on the “kindness of strangers” because of its large balance of payments deficit that is funded by foreign investors. (Writing by William Schomberg; Editing by Hugh Lawson)

BRASILIA (Reuters) - Brazil’s Finance Minister Henrique Meirelles will speak to major credit rating agencies on Thursday as the government scrambles to avoid a sovereign debt downgrade due to growing doubts that its proposed pension reform can rein in surging public debt.

FILE PHOTO: Brazil's Lower House President Rodrigo Maia and President Michel Temer arrive for the handover ceremony for the new Minister of Cities in Brasilia, Brazil, November 22, 2017. REUTERS/Ueslei Marcelino
A vote on the unpopular bill to overhaul the social security system, seen as vital to closing the fiscal deficit, has been delayed to 2018 after failing to muster support in Congress. Lawmakers have warned that handling the hot-button issue ahead of next year’s elections would reduce the chances of approval.

Meirelles said in a radio interview he will tell rating agencies the delay until February does not mean pension reform will not be approved. He told Radio Estadão it would be “reasonable” for the agencies to wait until the bill is voted on before deciding on a potential downgrade.

Lower house Speaker Rodrigo Maia on Monday said pension reform would be hard to approve if the bill is not passed by February. The first vote was put off last week and scheduled for Feb. 19 after the Christmas-to-Carnival holiday recess.

Maia told a news conference there is room to discuss a longer transition period for public sector employees, to include those who started working before 2003. While this would add to future pension costs, Maia said the government will refuse to give up one more penny in fiscal savings.

The current version of the bill would save 480 billion reais ($146 billion) over 10 years, according to government estimates, down from 800 billion reais in the original proposal, before concessions were made to try to win passage.

Brazil’s bloated pension system, which is especially generous for public sector employees, is the main cause of a huge budget deficit that cost Latin America’s largest nation its prized investment-grade credit rating two years ago.

The finance ministry said Meirelles will hold conference calls with rating agency representatives on Thursday.

Investors fear that failure to streamline social security could weaken Brazil’s recovery from a deep economic downturn, forcing the central bank to raise interest rates from an all-time low and triggering new sovereign rating downgrades in 2018.

Last week, Moody’s Investors Service calling the delay in voting on the pension bill “credit negative”.

“This raises the possibility that the reform will not be approved next year, given political uncertainty surrounding the presidential elections,” Moody’s said in a note to clients.

Reporting by Marcela Ayres and Maria Carolina Marcello; Writing by Anthony Boadle; Editing by James Dalgleish

The world's central banks recently signed off on the Basel III rules for bank capital. The new system, years in the making, is a step forward: It will make banks stronger and safer. But there are several loose ends. One of the most important concerns the treatment of sovereign bonds on banks' balance sheets.

Banks that hold large, concentrated portfolios of their own governments' bonds can be a threat to financial stability. This practice needs to be discouraged. Unfortunately, the Basel Committee decided, for now, not to act.

National regulators can choose to treat government bonds denominated in domestic currency as safe — and they do. All the committee members use this freedom to set the risk weight on such bonds at zero. This means their banks can load up on domestic sovereign bonds without needing to raise any more capital.

As a result, some banking systems serve as major creditors to their respective governments. According to a study by the Bank for International Settlements, government debt represents more than 10% of banks' assets in countries such as Spain and Japan. In Italy, it's nearly 20%.

These holdings pose a danger. If investors turn against those bonds, they might inflict severe losses on the banks concerned. If governments then have to step in, issuing more debt to meet the cost, the value of the bond holdings might fall again as the governments' creditworthiness is called into question — the so-called "doom loop" that can turn a banking upset into a fiscal and financial crisis.

Dealing with this requires care: A sudden regulatory change would force banks to sell their government bond holdings simultaneously, which might itself trigger a sovereign debt crisis. Also, some regulatory advantage for moderate holdings of domestic government debt isn't unreasonable. Banks may use sovereign bonds as collateral for managing liquidity, for instance, or act as market-makers for such securities. Those functions should be preserved.

Bearing this in mind, regulators would be wise to set a non-zero risk weight for sovereign bonds from a single country that exceed some given threshold, linked to the amount of capital held by the bank. For instance, the BIS study imagines a scenario in which sovereign exposures worth up to 100% of required capital would maintain their zero risk-weight, while holdings over that limit would require more capital.

Such a regime would have to be phased in. The new rules could be limited to newly-issued bonds, which would help to avoid a sudden shock. But the regulators ought to move in this direction soon — before the next sovereign debt crisis intervenes.

S&P cut Brazil's debt rating to BB-, three notches below investment grade and the same as Bangladesh, Macedonia and the Dominican Republic. The outlook is stable, S&P said.

The decision marks a defeat for Finance Minister Henrique Meirelles, who late last year met officials from the three major rating companies to fend off a downgrade. Lower house speaker Rodrigo Maia in recent days criticized those responsible for the pension revamp, an indirect slight at Mr. Meirelles that raised concern Mr. Temer's unpopular measures will be further disrupted.

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"This gives Meirelles and Maia the strongest argument they could have to convince lawmakers to vote pension reform and other measures to mend the budget gap," said Andre Perfeito, chief economist at Gradual Investimentos. "Let's see if they will make a lemonade out of those lemons."

Brazil's government gave up on efforts to vote on a social security reorganization in 2017 after struggling for support in Congress, kicking the bill back to this February and raising the prospect that nothing will be done about the country's ballooning pension obligations until after this year's October presidential elections.

Following a corruption scandal that undermined Mr. Temer's political capital, the government redoubled efforts to overhaul the costly pension system before lawmakers focus on campaigning. The plan was projected to save almost 400 billion reais ($124.4 billion) over 10 years by introducing a minimum age for retirement of 65 years for men and 62 years for women, among other measures.

"Despite various policy advances by the Temer administration, Brazil has made slower-than-expected progress in putting in place meaningful legislation to correct structural fiscal slippage and rising debt levels on a timely basis," S&P analyst Lisa Schineller said in a statement.

Mr. Meirelles told Bloomberg that S&P's decision reinforces the need for Brazil to pass the pension bill and measures already sent to Congress. He said he's confident that Congress will work in favor of "the reforms and the fiscal adjustment."

The nation lost S&P's investment-grade stamp in September 2015 and was further cut into junk in early 2016, a move that was followed by Moody's Investors Service and Fitch Ratings.

Brazilian financial markets oscillated last year in tandem with the changing fortunes of the pension overhaul plan. Brazil's real was little changed at 3.2163 per dollar as of 8:03 a.m. in New York Friday as the Ibovespa retreated 0.3%. The cost of insuring Brazilian bonds in the credit-default swaps market for five years decreased, while the yield on the nation's benchmark 10-year bonds rose to 4.5%.

The rating cut could also make it more expensive for Brazil to raise money in capital markets while rates are relatively low. Argentina paid 1 percentage point less this month to sell bonds than it did a year ago.

"The absence of cohesive political support for corrective economic measures that we have seen thus far diminishes the prospects for such a solid and prompt response following the 2018 elections," Ms. Schineller said.

That didn’t last long. Less than a year after Pimco praised Brazil’s financial overhaul agenda, the fund manager doesn’t rank it on a list of "reform stories." Why? The government’s decision to delay a comprehensive revamp of the nation’s bloated and inefficient pension system.

“We’re not particularly bullish on pension reform roll-out in the near term,” said Yacov Arnopolin, a Pacific Investment Management Co. money manager in London who includes South Africa, Mexico and Argentina as places where reform is progressing. “Our short list is focused on places where we can see favorable momentum.”

Brazilian Assets This Week
Real, bonds and CDS weaken while stocks reach new record highs after pension bill falters*

Source: Bloomberg

* Change from Feb. 19 to Feb. 23

Brazil gave up on putting the pension bill to a vote this month after it called in the military to restore order in the state of Rio de Janeiro, home to the violence-plagued city that is the country’s marquee tourist attraction. By law, changes to the Constitution such as those envisaged by the unpopular bill can’t take place during a military intervention.

Aiming to reassure investors, the government did create a new priority agenda, including economic proposals such as the independence of the central bank independence and tax simplification measures. That wasn’t enough for Pimco, which nine months ago cited Brazil’s improving fundamentals, a stable currency and an ongoing reform agenda.

Arnopolin says Pimco does remain overweight in Brazil’s external debt, focusing on corporate bonds and so called quasi-sovereigns. During the past twelve months, Brazilian corporate debt returned about 7.6 percent, outperforming the emerging-market average of 4.8 percent.

While Brazilian stocks surged after the vote was put off on Monday, the real and U.S. dollar bonds fell and credit-default swaps widened. The real rose 0.3 percent to 3.2428 per dollar as of 9:44 a.m. in New York.

BRASILIA, Feb 23 (Reuters) - Fitch Ratings cut Brazil’s credit rating further into junk territory on Friday, saying the country’s failure to put a social security overhaul to a vote undermines public finances.

The cut to BB-minus from BB, with a stable outlook, mirrors rival rating agency S&P’s downgrade in January.

Brazil’s government has put off a vote on a constitutional amendment to reform the pension system, seen as vital to shoring up the country’s finances, following a military intervention in response to violence in Rio de Janeiro state.

No constitutional amendments can be voted on during such an intervention, with the move seen as putting off any vote until after the October elections.

Fitch’s subsequent downgrade is not surprising and further downgrades are expected if there is no movement on pension reform, said Edward Glossop, Latin America economist at Capital Economics in London.

“Government officials have now essentially admitted that the pension reform is basically dead in the water,” Glossop said. “It obviously falls on the next government to reform the pension system and fix the fiscal position.”

“Any downgrading in confidence is bad,” Eliseu Padilha, chief of staff to President Michel Temer, told Reuters. “However, in this case, it comes in contradiction of the Bovespa having passed 86,000 points. This is indicative of great confidence.”

Brazil’s Finance Ministry said in a statement the government remains committed to its macro and microeconomic reform agenda, although it did not mention pension reform.

The country’s sovereign debt currently has a healthy composition with low exposure to foreign exchange risk, a low concentration of maturities in the near term and a diverse investor base that reduces inherent risks, the ministry said.

Brazil lost its investment-grade rating in 2015 just as the country was heading into a two-year recession with the government of then-President Dilma Rousseff failing to rein in a ballooning budget deficit. (Reporting by Jake Spring; Additional reporting by Lisandra Paraguassu and Suhail Hassan Bhat; Editing by Arun Koyyur and Jeffrey Benkoe)